Taxing Mail Orders and Barter

Where there is a sales tax, in order for it to be effective, it has to be consistent. This is why, for example, in California, the state sales tax applies also to mail orders. If you purchase goods from a company that has no presence in the state, the buyer is legally obligated to pay the sales tax even if the seller does not charge it. This is called a “use tax,” but few people pay it on goods personally imported except for cars.

The state does not bother to enforce the use tax, because the enforcement would be expensive and intrusive. But if the federal government switched from income taxation to a national sales tax, then the tax evasion would be much greater, and the benefit-cost ratio would swing to the national enforcement of taxes on personal purchases from abroad.

With a national sales tax, goods directly purchased from a firm in another state would be taxed, and the federal tax records would be used by the US states to enforce their sales taxes, so the evasion of use taxes by mail order from other states would end. However, there would be a problem with goods directly purchased from foreign sellers.

The US federal government is spending $6.3 trillion dollars in 2012. The gross domestic product is $15.4 trillion. The ratio of federal spending to GDP is about 40 percent. Half of that is for transfer payments, so private spending for goods is 80 percent of GDP, or $12.3 trillion. If all the $6.3 federal spending is from sales taxes, the sales tax rate on the $12.3 trillion spending is 51 percent. Add a national state sales tax average rate of over 9 percent, and the sales tax rate becomes 60 percent.

However, the “Fair [Sales] Tax” movement says that business-to-business purchases would be exempt from the national sales tax, because it is “fair” to tax households, but “unfair” for firms to pay sales taxes. Under the FairTax (HR25), government spending is taxed, but Congress would most likely make spending by government tax exempt, or else governments would shift the provision of public goods to subsidized public utilities..

Since household spending is 70 percent of GDP, business and government spending is 30 percent. Since 70 percent of $15.4 trillion is $10.8 trillion, to pay for the federal spending of $6.3 trillion, the private sales tax rate would have to be 6.3/ 10.8 = .58, or a sales tax rate of 58 percent. Add the state sales tax of 9 percent to get the total sales tax rate of 67 percent. If some states switched from taxing income to higher taxes on sales, the combined rate would be even greater.

With a tax rate of 67 percent on goods, there would be massive tax evasion. People would order goods directly from foreign firms. To prevent tax evasion, the federal government would have to open all packages shipped in from abroad. There would also be colossal amounts of smuggling of goods. To fully enforce the “Fair Tax,” the government would have to randomly send FBI agents into people’s homes. If you did not have a sales receipt, you would be presumed to be a tax cheater, and have to pay the tax plus a big fine. There would also have to be intrusive audits on enterprise to make sure they are not buying goods tax-free for personal use.

It would be political suicide for any establishment political party to advocate a national sales tax. Only minor parties such as the Libertarian Party would be foolish enough to campaign for a national sales tax that would so greatly destroy privacy. Moreover, the combined tax rate of 67 percent would destroy millions of firms that are unable to pass sales taxes on to customers.

But it gets worse. Barter transactions are subject to both income and sales taxes. If you make shoes that sell for $100, but trade them for carrots, you pay the same income tax as you would selling them for cash, and the same sales tax. But many such informal exchanges currently escape both taxes. But with the federal government depending on sales taxes, the federal government would have to prevent barter tax evasion with extreme penalties along with rewards for snitches who inform on others. As with snitching for drug-law enforcement, snitching would be so lucrative that there would be much fraudulent snitching. Only minarcho-capitalist allodial libertarians would favor such a destruction of public trust.

Thus the switch from federal income taxes to a national sales tax would be so ruinous to the economy and to personal liberty that even state socialists are opposed to it. The real reason why the “Fair Tax” movement and its libertarian allies are for a national sales tax is to prevent a discussion of land value taxation. For that goal they have been successful, because the national debate on tax reform only discusses economy-crushing sales versus income taxes, and utterly ignores the free-market economy-enhancing policy of public revenue from land rent.